Cornell Real Estate Review Volume 13 Article 9 6-2015 Asian Capital Investing in US Real Estate Junwei (Eddie) Zhou Cornell University Follow this and additional works at: http://scholarship.sha.cornell.edu/crer Part of the Real Estate Commons Recommended Citation Zhou, J. (2015). Asian capital investing in US real estate. Cornell Real Estate 13(1), 66-73. Retrieved from http://scholarship.sha.cornell.edu/crer/vol13/iss1/9 This Article is brought to you for free and open access by The Scholarly Commons. It has been accepted for inclusion in Cornell Real Estate Review by an authorized administrator of The Scholarly Commons. For more information, please contact hlmdigital@cornell.edu.
Asian Capital Investing in US Real Estate Abstract Asian capital investment in the United States real estate market is becoming increasingly popular. This article analyzes the patterns and preferences of Asian investors in the US real estate market by examining transaction history and aggregating consensus data to provide the reader an overview of the growing trend. Keywords Cornell, real estate, Asian Capital, United States Real Estate, foreign capital, pension fund, state investment, sovereign wealth funds, investment trends, capital flows, foreign capital, joint ventures, Waldorf Astoria, Baccarat, Sunshine Insurance, Manhattan, second tier, gateway cities, tertiary markets, Boston, Seattle, New York, San Francisco, Los Angeles, institutional investors, retail investors, Cornerstone Real Estate Advisors, CREA, industrial real estate, logistics, warehouse, distribution center, retail real estate, State Owned Developer, Orix Real Estate, Japan, Volcker Rule, Hong Kong, China, Korea, Singapore, Malaysia, club deals, Houston, Chicago, investment concentration, private sector, institutional sector, office properties, hotel properties This article is available in Cornell Real Estate Review: http://scholarship.sha.cornell.edu/crer/vol13/iss1/9
Asian Capital Investing in US Real Estate By: Junwei (Eddie) Zhou Author Junwei (Eddie) Zhou received his Bachelor of Engineering degree in Polymer Material and Science from Tsinghua University, mainland China in 2009. After graduation, he started at a state-owned real estate development company in China. In 2010, Eddie became the project manager of Ecology City, an eminent-domain mixeduse project of nearly 8,000,000 square foot. Creating structured compensation packages for relocation contracts with local residents, Eddie minimized time, effort and budget during this phase, stimulating the company's cash flow. After gaining abundant knowledge in real estate development, Eddie decided to switch careers to real estate investment and finance, by pursuing a Master s degree in the Baker Program in Real Estate at Cornell University. In 2014, Eddie interned at Cornerstone Real Estate Advisers Hotel Group in Connecticut, where he performed acquisition analysis on over 20 upscale hospitality assets, both flagged and boutique. In addition, he supported asset managers, debt origination groups and other CRE groups within Cornerstone. Upon graduation, Eddie plans to pursue career opportunities in real estate investment and finance, and to bridge the gap between the Asian and United States real estate markets. Executive Summary: Asian capital investment in the United States real estate market is becoming increasingly popular. This article analyzes the patterns and preferences of Asian investors in the US real estate market by examining transaction history and aggregating consensus data to provide the reader an overview of the growing trend. Introduction Today, there is a material rebound of cross-border investment dollars into real estate, with Asia in particular significantly increasing its overseas positions. Based on volumes of executed deals, real estate investment in the United States (US) by Asian investors (pure foreign capital or joint ventures) in 2014 was almost $13 billion compared to $10.7 billion in 2013, and $2.4 billion in 2007, before the Great Recession. Some have called this trend a tsunami because both volume and growth are tremendous and have upsides and downsides. Some signature deals, such as the $1.95 billion Waldorf Astoria deal by An-bang Insurance, or the $2 million per key Baccarat deal by Sunshine Insurance, made the market more liquid, while it pushed the price in certain cities even higher. This paper focuses on three time periods: pre-recession (2001-2007); the recession and recovery period (2008-2012); and most recently (2013-2015). These periods exemplify different characteristics, especially total volume, which is the most important factor in capital markets. By performing this analysis, common patterns and preferences will be exposed, as well as several reasons for the patterns. General trends 120 100 $18,000,000,000 $16,000,000,000 $14,000,000,000 Annual Volume 80 $12,000,000,000 1 ) $10,000,000,000 60 $8,000,000,000 Historically, Asian investment 40 $6,000,000,000 in US real estate had been steadily $4,000,000,000 20 growing through 2008, when the $2,000,000,000 global financial crisis affected world markets. After hitting a low in 2009, 0 $- Asian investments in US real estate Deal Count Deal Volume started to recover quickly. In 2010, Figure 1: 1: Annual Asian Asian investments investments US in real US real estate estate (Sources: (Sources: RCA i ) RCA 1 ) the number had already reached pre-recession levels. The number of transactions in 2013 and 2014 more than doubled the volume of transactions in 2007; a previous historic high of 49. This trend is even more significant when focusing on volume. The total deal size in 2014 was almost $16 billion, compared to the previous peak of $3.8 billion in 2006. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 i Cross-Border Capital Tracker, Real Capital Analytics. The whole data set includes a total of 594 transactions, dating from 01/01/2001 to 02/03/2015. Main parameters used are: Property Type, Geographical Market, Transaction Date, Deal Size, Buyer s Country of Origin, and Buyer s Capital Sector. Detailed explanations of each parameter will be provided in corresponding sections. Also, please note that not every transaction out of 594 contains all the parameters. For example, buyer s capital sector maybe unclear for certain transactions due to complex off-shore corporate structure; or deal size may be undisclosed. 66 1 Cross-Border Capital Tracker, Real Capital Analytics. The whole data set includes a total of 594 transactions, dating from 01/01/2001 to 02/03/2015. Main parameters used are: Property Type, Geographical Market, Transaction Date, Deal Size, Buyer s Country of Origin, and Buyer s Capital Sector. Detailed explanations of each parameter will be provided in corresponding sections. Also, please note that not every transaction out of 594 contains all the parameters. For example, buyer s capital sector maybe unclear for certain transactions due to complex off-shore corporate structure; or deal size may be undisclosed.
Geographical Markets Top 10 US Geographical Markets by Total Deal Size US Markets Total Deal Size US Markets Total Deal Size US Markets Total Deal Size Manhattan $2,098,383,317 Manhattan $4,354,628,636 Manhattan $10,793,130,221 San Francisco $1,850,577,000 San Francisco $2,016,408,493 Hawaii $4,191,384,673 Chicago $840,143,582 DC $954,936,600 Los Angeles $4,101,093,562 Boston $561,179,484 Chicago $937,201,433 San Francisco $1,322,776,752 Phoenix $386,100,000 Miami $796,741,484 DC $1,038,300,000 Houston $364,300,000 Los Angeles $684,502,463 Chicago $1,021,472,500 Charlotte $315,500,000 Phoenix $351,666,167 Houston $835,400,000 Richmond $292,550,000 Hawaii $296,720,000 East Bay $636,648,924 San Diego $272,726,978 Philadelphia $214,080,899 Boston $532,197,000 Atlanta $201,345,940 Houston $205,121,927 Phoenix $429,245,788 Grand Total $7,182,806,300 Grand Total $10,812,008,102 Grand Total $24,901,649,420 Table 1: Top 10 US Geographical Markets by Total Deal Size (Sources: RCA) Manhattan is a clear favorite for Asian capital. San Francisco, Chicago, Phoenix and Houston are also consistently ranked on the list. Besides these favored cities, Asian investments usually follow real estate market trends in the US. For example, some cities, such as Charlotte, Richmond and Atlanta made the list pre-recession, but were not top choices afterward. This is because such second-tier cities were hit harder during the global financial crisis, and are not recovering as fast as gateway cities, which by today s Asian investors standards, usually include New York, San Francisco, Los Angeles, DC, Chicago; and in some cases, Boston, Houston and Seattle. Miami made the list in the recovering period. However, a single Malaysian investor contributed more than half of that investment amount. Thus, this would not represent a broader trend. Asian investments by US Geographical Markets by No. of Deals US Markets No. of Deals US Markets No. of Deals US Markets No. of Deals Boston 28 Los Angeles 20 Manhattan 27 San Francisco 11 Manhattan 19 Los Angeles 25 Atlanta 8 San Francisco 16 Seattle 15 Chicago 7 Houston 10 San Francisco 13 Manhattan 6 Phoenix 9 Inland Empire 11 Orange Co 5 San Jose 8 Houston 11 Seattle 5 Chicago 8 Boston 11 Phoenix 4 Las Vegas 6 Orange Co 10 Detroit 3 DC 6 Hawaii 10 San Diego 3 Hawaii 6 San Jose 9 Tucson 3 Miami 6 Chicago 9 Orlando 3 NJ 6 Los Angeles 3 Boston 6 Baton Rouge 3 Dallas 3 East Bay 3 Others-Northwest 3 Las Vegas 3 Grand Total 104 Grand Total 126 Grand Total 151 Table 1: Asian investments by US Geographical Markets by No. of Deals (Sources: RCA) Ranking the total number of deals yielded interesting results. The deals were widespread throughout the country prior to the recession. Since then, deals have been more widespread. California is receiving lots of attention, with a notable number of deals in submarkets such as Orange County, San Jose, and Inland Empire. Boston topped the list pre-recession thanks to a portfolio deal. If counting that as one deal, the number of deals Boston received was 6, which is steady across time. Seattle, now considered a gateway city Table 1 Top 10 US Geographical Markets by Total Deal Size (Sources: RCA) Table 2 Asian investments by US Geographical Markets by No. of Deals (Sources: RCA) 67
Table 3 Asian investments by property types and total deal size (Sources: RCA) Table 4 Asian investments by property types and number of deals (Sources: RCA) by some Asian investors, has seen a large amount of activity recently. Since Seattle is not on the list by volume, it may indicate that Seattle is more attractive to smaller investors. As a trend, gateway cities are gaining more attention from Asian capital, with both institutional and retail investors. Asian investments by property types and total deal size Property Types Total Deal Size Apartment $ 565,225,932 $ 1,156,120,469 $ 1,424,224,154 Hotel $ 1,365,802,650 $ 2,022,537,797 $ 10,347,422,254 Industrial $ 333,675,202 $ 348,715,931 $ 804,136,778 Office $ 6,584,913,328 $ 8,680,823,028 $ 14,354,488,270 Retail $ 180,650,000 $ 735,577,629 $ 735,342,500 Grand Total $ 9,030,267,112 $ 12,943,774,854 $ 27,665,613,956 Table 1: Asian investments by property types and total deal size (Sources: RCA) Asian investments by property types and number of deals Property Types Total Deal Count Apartment 29 51 34 Hotel 15 25 49 Industrial 22 26 40 Office 76 69 69 Retail 9 19 19 Grand Total 151 190 211 Table 1: Asian investments by property types and number of deals (Sources: RCA) Property Types Addressing property types, office stands out as the favorite, both by volume and by deal count. Its popularity is reasonable since office provides stable and predictable cash flow and is less risky, thus perfect for Asian capital not familiar with the US market. Second choice, interestingly, is hotels. Hotels usually only represent less than 15% to 20% of a typical domestic investor s asset allocation in real estate and is less than the allocation for multifamily. For Asian investors though, their investments in hotels are consistently more than double the size of multifamily. Most recently, hotel investments represent 37.4% of total real estate investments by Asian investors. Further, reviewing the data reveals that it is not skewed by outliers considering that: The investments are made by many investors, including sovereign wealth funds, public REOCs, REITs, private developers, equity funds, and high net worth individuals. The investments are geographically diversified, most notably in gateway cities and Hawaii. Multifamily, alternatively, is not as popular as it would be with US investors. However, by ranking the number of deals, we can see that the volume of apartment deals is roughly equal to that of hotels. One possible explanation could be that because hotels take on more risk, Asian investors prefer to invest in less risky locations, where prices are highest, thus leading to higher total deal sizes. Based on Cornerstone Real Estate Advisers (CREA) data 2, some institutional Asian investors do not view residential investment, either for sale or rental, as a means of diversification, The reason is that residential markets in Asian countries are huge, already representing a large portion of these institutional investors portfolios. 68 2 Meeting briefs with more than 50 major Asian investors, courtesy of CREA, Cornerstone Real Estate Advisers. This set of data focuses more on investment criteria. In order to protect client information, results are aggregated with the parameters mentioned above.
Industrial, including logistics, is becoming increasingly popular among Asian investors. In recent years, a greater number of deals and larger volume has taken place in these sectors. Based on CREA data 3, this is because the logistics industry is considered more advanced in some Asian countries like China, South Korea, and Japan. These countries are experiencing fast growth in e-commerce, and investors have been investing in logistics for a long period. As a result, they are more familiar with and comfortable investing in this property type. Retail has not been invested heavily in by Asian investors. Based on CREA data 4, the main reason is that Asian investors view retail in the US as a different model from retail in their domestic countries. Retail in Asia is usually vertical and exists in mixed-use projects, whereas, in the US, malls are the dominant form. It should be noted that some investors in the private sector, often developers, are acquiring retail in the US for the purpose of learning this different model and may apply it in their domestic country. Retail is not seeing a lot of attention. Based on CREA data, the main reason is because Asian investors view retail in US as a different model from retail in their domestic countries. Retail in Asia is usually vertical and exists in mixed-use projects, whereas in the US, malls are the dominant form. It should be noted though that some investors in the private sector, often developers, are acquiring retail in the US with the purpose to learn this different model and may apply it in their domestic real estate markets. Asian investments by capital sector and total deal size Capital Sector Total Deal Size Corporate $627,566,110 $965,606,417 $835,742,891 Equity Fund $45,000,000 $153,620,000 $600,000,000 Institutional, Bank $47,640,667 $70,100,080 $638,000,000 Institutional, Finance $372,904,852 $82,214,000 $8,000,000 Institutional, Insurance $2,187,050,000 $2,726,250,000 Institutional, Investment Manager $593,524,500 $426,141,847 $1,558,370,000 Institutional, Pension Fund $2,435,837,446 $1,014,359,671 Institutional, Sovereign Wealth Fund $808,506,532 $910,000,000 $5,252,802,541 Multiple $176,000,000 $921,050,000 $255,400,000 Other $172,850,200 $8,075,000 Private $93,800,000 $61,774,300 $298,855,500 Private, Developer/Owner/Operator $638,633,300 $2,414,094,077 $5,938,512,009 Private, High Net Worth $2,536,907,500 $1,858,002,861 $4,265,789,419 Public, REIT $16,000,000 $69,900,000 State Owned Developer $4,002,783,925 Public, REOC $902,733,652 $2,288,983,625 $166,373,000 Grand Total $9,030,267,112 $12,776,274,854 $27,639,213,956 Table 1: Asian investments by capital sector and total deal size (Source: RCA) Notes: Multiple means multiple buyers from different capital sectors are involved. State Owned Developer is different since it is neither private nor public. Other refers to other sectors, such as education or religion, etc. Table 5 Asian investments by capital sector and total deal size (Sources: RCA) Capital Sector Interesting trends are evident when exploring the data above. Equity funds and banks historically have had low deal counts, and they still do, but the deals have become much larger in size. Investments made by traditional finance companies, such as Orix Real Estate from Japan, saw a steep decline. This may be related to whether the Volcker Rule 5 could affect 3 Ibid 4 Ibid 5 Named after former Federal Reserve Chairman Paul Volcker, the Volcker Rule disallows short-term proprietary trading of securities, deriva- 69
Table 6 Asian investments by capital sector and deal count (Sources: RCA) Asian investments by capital sector and deal count Capital Sector Total Deal Count Corporate 11 36 23 Equity Fund 4 4 8 Institutional, Bank 3 3 2 Institutional, Finance 19 2 1 Institutional, Insurance 12 4 Institutional, Investment Manager 10 3 14 Institutional, Pension Fund 21 21 Institutional, Sovereign Wealth Fund 21 1 8 Multiple 1 4 9 Other 4 1 Private 4 4 10 Private, Developer/Owner/Operator 37 41 49 Private, High Net Worth 6 35 18 Public, REIT 1 1 State Owned Developer 35 Public, REOC 23 29 6 Grand Total 151 188 210 Table 1: Asian investments by capital sector and deal count (Sources: RCA) foreign financial institutions, based on concerns of similar investors according to CREA data. 6 Insurance companies, historically having made a moderate number of transactions, completely ceased making deals during the recessions and, while they are recovering, they are making fewer large deals. Sovereign Wealth Funds are becoming a more powerful force in terms of deal size compared to the past. This sector would be even stronger if we include state-owned developers. In a further examination of the data, most of these investors are from China and Japan. Based on CREA data, the reasons are assumed to be twofold: first, they have reached a threshold where they can no longer get higher returns domestically; second, they need to diversify their portfolios. We can expect to see more investments from pension funds as they are increasing their allocation to real estate to achieve higher returns. Other notable investors include high net worth individuals and investment managers. Table 7 Asian investments by country of origin and total deal size (Sources: RCA) 70 Asian investments by country of origin and total deal size Country of origin Total Deal Size Japan $ 4,027,772,080 $ 2,838,287,973 $ 6,174,680,476 China $ 16,380,000 $ 2,547,787,661 $ 6,014,494,628 Hong Kong $ 3,148,281,700 $ 1,099,866,123 $ 4,032,207,548 Multiple $ 0 $ 1,735,300,000 $ 4,958,733,333 Korea $ 0 $ 2,794,424,146 $ 2,822,909,671 Singapore $ 808,506,532 $ 146,225,333 $ 2,630,854,212 India $ 280,604,300 $ 887,557,673 $ 66,670,000 Malaysia $ 0 $ 503,359,637 $ 660,000,000 Taiwan $ 393,222,500 $ 251,301,307 $ 142,795,933 Pakistan $ 311,000,000 $ 0 $ 0 Thailand $ 44,500,000 $ 86,915,000 $ 104,000,000 Indonesia $ 0 $ 25,350,000 $ 26,868,154 Philippines $ 0 $ 16,000,000 $ 0 Afghanistan $ 0 $ 5,400,000 $ 0 Macau $ 0 $ 0 $ 5,000,000 Grand Total $ 9,030,267,112 $12,937,774,854 $27,639,213,956 Table 1: Asian investments by country of origin and total deal size (Sources: RCA) tives, commodity futures and options on these instruments for banks own accounts under the premise that these activities do not benefit banks customers. In other words, banks cannot use their own funds to make these types of investments to increase their profits. 6 Meeting briefs with more than 50 major Asian investors, courtesy of CREA, Cornerstone Real Estate Advisers.
Asian investments by country of origin and deal count Country of origin Total Deal Count Total Japan 66 45 50 162 China 1 48 56 105 Hong Kong 46 22 29 98 Korea 31 32 63 Singapore 21 7 14 43 Taiwan 8 12 8 27 India 7 9 5 21 Multiple 4 11 15 Malaysia 5 1 6 Thailand 1 3 1 5 Indonesia 1 2 3 Afghanistan 1 1 Pakistan 1 1 Philippines 1 1 Macau 1 1 Total 151 189 210 554 Table 1: Asian investments by country of origin and deal count (Sources: RCA) Capital s Country of Origin Table 8 Asian investments by country of origin and deal count (Sources: RCA) The list is sorted in order of descending total in their respective categories. While the common assertion is that Chinese capital is leading the herd, Japan is still the top country investing in US Real Estate regarding both deal size and deal count. China, however, is quickly catching up especially since China made a key investment pre-recession, resulting in an amazing speed of the increase in China s capital. This is because China invested in the Chinese real estate market, which was booming at the time. Now with the domestic market cooling down, the Chinese capital is seeking investments overseas. Not surprisingly, Hong Kong, Korea, and Singapore are also the top countries/regions of the capital s origin. Other countries and regions such as India, Malaysia and Taiwan are also making sizable investments though smaller compared to the top countries. The rest of the countries/regions made minimal investments and did not form a large enough data set to generate any meaningful findings. An interesting trend is that we see more and more club deals not only with different capital sectors, but also from different countries/regions. Most of these deals are institutional capital, indicating some commonality between the players. Particularly strong trends In this section, we will use multiple parameters from the previous section to analyze if a certain correlation exists. The analysis is based mainly on recent (2013 to 2015) data. Here are the findings: Japanese investments in Hawaiian hotels: Since 2013, there were ten investments in Hawaii, of which 9 were hotels. Of these 9, 8 were Japanese investors. Though one portfolio deal contributed more than 70% to the trend, it should be noted that the Japanese have a taste for Hawaiian hotels since Hawaii is a favorite destination of the Japanese. In 2013, the Japanese share of total tourism expenditure in Hawaii was 17.1%, only rivaled by that of the US domestic consumers. Chinese investments in Houston multifamily: Since 2004, there were 27 investments in Houston made by Asian investors. 20 were multi-family. One portfolio deal made by 71
a JV between Gaia Holding (US), Menora Mivtachim Holdings (Israel) and Grand China Fund (China), contributed nine deals. Another portfolio deal made by Standard Portfolios (China) contributed eight. Based on CREA data 7, more than half of the Chinese insurance companies expressed interests in Houston and multifamily. We can expect to see this momentum continue in the coming years. Part of the reason for this is that capital to be deployed overseas, a certain protocol must be followed. Government officials have the power to prevent an investment from being made; as a result, investors would choose cities that government officials would be familiar with to reduce time spent persuading said officials. Houston, being the home of the Houston Rockets where Yao Ming played in the National Basketball Association (NBA), gained a level of popularity amongst Chinese people, including the government officials. Also of note, these gateway cities are not only large in the economic base, but also house a large population of Chinese immigrants. Chinese insurance companies investing in hotels: Some signature deals last year would easily make people think that there is a trend of Chinese insurance companies investing in hotels. However, that is not the case. Based on CREA data, 8 though more than half of insurance companies would consider hotel investments, they do not prefer it to multifamily, and office. This so-called trend is heavily influenced by personal preferences of a few executives overseeing overseas investments at those insurance companies, thus it would not represent a pattern. Table 9 Investor Consensus (Sources: Cornerstone Real Estate Advisers LLC 9 ; Author 10 ) Consensus data from Cornerstone In this section, investors are categorized by capital sector because they share strong commonalities in preference. 72 Sovereign Wealth Fund Insurance Company Pension Fund Bank Private, Owner/Develo per High Net Worth Required Table Property 9: Investor Deal Size Consensus Key Driver (Sources: Key Cornerstone Concern Real Estate Other Issues Advisers LLC 2 ; Return Types Author 3 ) 910 11 High-single Office, $100 MM Diversification Will also consider debt investments, digit for Core Residential Minimum some agree to do development debt if 15% for Valueadded (Retail, Hotel, can understand the risk. Some will Others) consider secondary and tertiary markets. 6% Cash on Cash 15% levered IRR >10% levered IRR Office, Residential (Retail, Logistics, Others) Some would only consider office. Has individual rules for property types to invest in. $100 MM Minimum $100 MM average $50 MM Minimum Diversification Return Tax Structure FIRPTA Tax Structure FIRPTA Whether the Volcker Rule would apply Control of asset Table 1: Investor Consensus (Sources: Cornerstone Real Estate Advisers LLC; Author) Some are willing to do development deal. Would only invest in gateway cities. Would only consider core investments in major cities. Have individual rules for cities to invest in. Some would consider real estate securities. Holding period can be very long. 7 Ibid 8 Ibid 9 Meeting briefs with more than 50 major Asian investors, courtesy of Cornerstone Real Estate Advisers. This set of data focuses more on investment criteria. In order to protect client information, results are aggregated with the parameters mentioned above. 10 Conversations with more than 20 Asian investors. This set of data is similar with CREA Data, but is based on the author s conversation with Asian investors, specifically for the topic discussed here. The investors don t overlap with CREA Data, thus will be used at the same time, and will not be specifically referred to differently.
Conclusion Through analysis of the data presented, we can clearly see that investments from Asian capital are on the rise: 1. Volume wise, the total transaction size in the past two years is more than that before 2013, indicating a tremendous growth. 2. Geographically, Asian capital is more focused in gateway cities such as New York City, San Francisco, and Chicago. 3. Office and hotel are the most invested property types. 4. Both the private and institutional sectors are growing strong, led by Sovereign Wealth Funds and developer/owner/operators. 5. Japan is still the top country of origin though China is quick catching up. It should be noted that many of the types of investors mentioned are still testing and learning the US market. That is why they currently focus investments in gateway cities, and in less risky property types. As they know more about the market, and as some countries (such as China) are lifting their restrictions on foreign investments, we can expect to see more capital investment. 73